A young family with two small children and a dog on a walk in autumn nature.

Fall Tax Tips and Planning

With the end of summer comes a shift away from fun and sun towards back-to-school and schedules. While preparing for the changes that fall brings, remember that summertime and school-related activities often have specific tax implications and may need special attention when it comes time to file tax returns next spring. Below are some common situations to keep in mind now so that you do not miss out on tax breaks and deductions.

Summer Jobs for Students

High school and college students working over the summer typically are not thinking ahead to tax filing time. In fact, getting that first paycheck as a new wage-earner might even bring disappointment when seeing the deductions pile up and the cash decreases. The good news is that even if the student does not earn enough to meet the tax filing requirement, they may still file a tax return and recover the tax withheld.

If a student works over the summer, they likely receive either a form W-2 or 1099. Employers generally must withhold Social Security and Medicare taxes from W-2 employees, even if the employee does not earn enough to require federal income withholding. If federal tax is withheld and the income is less than $12,400 (the federal earned income filing threshold for 2020), filing a return will often yield a refund of the income tax withheld. If a student receives Form 1099 and earns more than $400, they will need to file a tax return and report the income that is subject to the self-employment tax, in order to pay their share of Social Security and Medicare taxes. If filing as a self-employed individual, related expenses can offset the 1099 income, so gather those allowable deductions now while still fresh in your mind.

Vacation Home Rentals

With the increasing popularity of home-sharing sites such as VRBO and Airbnb, homeowners are finding it easier to turn empty homes into extra cash. If you enjoy a vacation home and rent it during the year, special rules apply. If the property is rented for fewer than 15 days in the tax year, you are not required to include the rent you receive as taxable income. However, you are also not permitted to deduct expenses associated with the rental. If you do rent the property for more than 14 days during the year, you must report the income. In this case, related expenses may be deducted up to the extent of rental income. Expenses are calculated based on the number of days used for the rental vs. the number of days of personal use.

Keeping detailed records throughout the year will help maximize the tax benefits and ease the reporting burden come tax filing time. Some property management companies and home-sharing sites provide summarized tax information and 1099 forms, but it is best also to maintain your files.

Weddings

Getting married during the year will impact your tax filing situation. The most significant change is that your filing status will switch from Single to either Married Filing Jointly or Married Filing Separately. Actions that you can take now will help make your tax filing process smoother.

  • Look at your W-4 forms on file with your employers to determine if your withholdings need to be adjusted. Combining your income on a joint tax return may change the amount of withholding required, since you may be in a different tax bracket or subject to the Additional Medicare Tax.
  • If you change your name with the Social Security Administration, the IRS will automatically receive the change associated with your Social Security Number (SSN). Be sure that your name change is correctly reported on your tax return when it is filed. A mismatch between your name and SSN on your tax return and the records the IRS has could cause a rejection of your tax return and a delay in processing.
  • If you or your spouse moved upon getting married, report the new address to the IRS. Form 8822, Change of Address, can be mailed to the IRS at any point after the move. The mailing address on your tax return should reflect your new address.

Child Care Expenses – Summer Camps

Expenses for children under the age of 13 to attend day camps as a means of childcare are likely eligible for the Child and Dependent Care Credit. To be eligible for the credit, the expenses must be incurred to provide care for a child while the taxpayer and spouse, if filing jointly, are working, looking for work, or attending school full-time. Costs for overnight camps and supplies, though, do not qualify for the credit. Summer tutoring or summer school costs also are not qualified expenses.

To claim the credit, total expenses and the name, address, and taxpayer identification number of the provider are reported on Form 2441, Child and Dependent Care Expenses. Annual expenses up to $3,000 for one child or $6,000 for two or more children may be claimed for the credit.

Education Benefits

Writing checks for college tuition can be painful. Many taxpayers realize some tax benefit, however, via the American Opportunity Tax Credit or the Lifetime Learning Credit.

The American Opportunity Tax Credit is:

  • Worth a maximum benefit of up to $2,500 per eligible student.
  • Allowed only for the first four years at an eligible college or vocational school.
  • For students pursuing a degree or other recognized education credential.
  • Partially refundable. If the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.
  • Allowed only if the student maintains at least half-time status.

The Lifetime Learning Credit is:

  • Worth a maximum benefit of up to $2,000 per year, regardless of how many students qualify.
  • Available for all years of postsecondary education and for courses to acquire or improve job skills.
  • Available for an unlimited number of tax years.
  • Allowed if a student does not maintain at least half-time status.

In general, qualified expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools). The expenses paid during the tax year must be for an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year. For the American Opportunity Tax Credit but not the Lifetime Learning Credit, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study.

The following expenses do not qualify for the credits:

  • Room and board
  • Transportation
  • Insurance
  • Medical expenses
  • Student fees, unless required as a condition of enrollment or attendance
  • Expenses paid with tax-free educational assistance
  • Expenses used for any other tax deduction, credit or educational benefit

Final Comments

Addressing tax situations throughout the year is good practice to capture information that will ease the burden when filing time comes around. This is especially true in years when significant life events occur or major tax legislation affects the tax landscape. If you would like to discuss any of these planning topics, please reach out to your HBK tax advisor, and look for our comprehensive Planning Letter in November.

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About the Author(s)
Rebekah A. Flanders is a Manager in the Hermitage, PA office and has more than 16 years of public accounting experience. Her focus is on providing tax compliance, planning, and research services for individuals and various types of business entities.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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